Defensive Stocks May Not Always BE Safe – Here's Why You Need to Look Deeper

Is Coca-Cola a smart defensive play? Explore a detailed breakdown of fundamentals, historical performance, and alternatives for 2025.

What, already? Ok, so we are one, ONE day into the new year and the worriers have already entered the room. I know that the markets have been a bit like a wet noodle over the past few sessions. I also know that we would all have loved to see stocks raging into the new year like a flaming bull, because… well, why not, everyone is supposed to be happy at this time of year. Where the hell is Santa Claus? Is he even real? CALM DOWN! We have 249 more trading sessions to go for the year; you are going to burn yourself out!

I read through a half a dozen articles by respectable folks warning that now was the time to buy some defensive ETFs or something like that. They posit, maybe have a look at the healthcare sector or the consumer staples sector. I am not sure that I am ready to go all in on those sectors just yet, but I thought I would have a quick look to get a baseline. First let’s start with my favorite chart… AGAIN.

Yes, this is the new messy pasta chart. It is fashioned from the same R-language function I created for page 17 in my daily chartbook, but this one captures the whole of 2024, while page 17 captures Trump’s rise through yesterday’s close. What I want you to see on this chart is exactly where the healthcare and consumer staples ETFs ended the year as well as the journey they took to get there. I am not going to waste any more time talking about healthcare, because there are lots of headwinds for the broader sector, and until those are worked out in the months ahead, the sector will not behave like it is supposed to, regardless of economic or market conditions. That leaves us with staples, you know the stuff that we need no matter what is happening in the world. That is one of the reasons why the sector is considered to be defensive. Another reason is the companies that fit into the sector. They are typically more established companies that pay solid and growing dividends. They are not shooting for the stars hoping to capitalize the hottest trends. No, their business models are to serve up the basics in all weather conditions.

Before I go any further, I need you to realize that a well-appointed portfolio has allocations in almost all, if not all sectors. It is the level of allocation that can and should be changed based on expected market conditions and the risk tolerance of the portfolio owner. Ok, so back to consumer staples. You will see, from the chart above, that the sector had a bumpy, lackluster year that left it the leader of the losers. Most folks would look at the chart and say that maybe it is cheap, but not broken like materials, healthcare, real estate, or energy. I am not ready to say anything of the sort yet.

Let us look one level below the surface of the ETF, at say, maybe its top four holdings. Those would be Costco (COST), Procter & Gamble (PG), Walmart (WMT), and Coca-Cola (KO). By knowing these four names, you should get a clear idea of what a consumer staple is if you didn’t already know. Of those four stocks, the best performer was Costco, which logged a gain of 39.62% (including dividends) for 2024. The category loser was Coca-Cola which returned only 8.87% for the year. The overall return for the sector was 12.19%. So, Costco, way outperformed, and Coca-Cola became an also-ran… no, actually a loser as three out of the top four over-performed, while Coke under-performed. This leads us to question whether Coca-Cola is worth a look, now that it appears to be on sale.

Ok, now pay attention. The company has beaten EPS estimates in three out of the last four quarters. 76% of analysts that cover the stock rate it a BUY (the rest rate it a HOLD), and on average, those analysts anticipate that the company has an upside of 19% based on average 12-month targets. In the past month, 2 analysts raised their price targets for the stock and 4 lowered them. The company’s next earnings announcement is expected on 2/13 and based on current estimates it is expected to have declined quarter over quarter, though the company appears to have seasonal pattern with Q4 being its weakest. That said, in a similar pattern to 2024, earnings are expected to grow for the next two quarters with slight but positive year-over-year EPS growth. Coke’s forward PE multiple is 20.80x, very slightly higher than the 20.09x of its peer group. Its 20.8x forward PE is cheaper than its 2-year historical PE of 22.1x. The company has an estimated operating margin of 30.6%, which is higher than the 21.9% margin of its peers, so it is expected to be more profitable. Despite its pullback in the second half of 2024, there were only 2 insider events. Both took place in November and were net sellers, meaning insiders were not buying despite its decline. Finally, the company has a dividend yield of 3.14%, compared to the 2.94% median yield of its peer group but its P/FCF multiple is 78x versus the 32.8x P/FCF of its peer group, which means that it is either highly overpriced or its cash flow is weak compared to its peers, and weak cash flow implies that dividend growth could be stifled. So, is Coke worth a look to protect you in the potentially bumpy days ahead?

Leaving these fundamentals aside, you may want to know how the company performed in tough times. Let’s get extreme and go back to the Great Recession. During the recession period, the stock declined by 22.5% versus a 26% decline in the S&P500. So, while it declined, it declined less than the broader market. Oh, but the entire consumer staples sector declined by only 21% during the recession period.

None of that seems exciting, does it? Coke may be a solid long-term hold with a respectable and growing dividend of 3.14%, and Warren Buffet loves it, but is it the best choice for your portfolio over the next six months? Finally, did you know that only about 40% of Coca-Cola’s customers are domiciled in the US? That means that 60% of the company’s revenues are subject to the raging Dollar, making them worth less, if repatriated. Where is the dollar going from here? Well, if the economy falters it could weaken the Dollar, which might help Coke’s case.

Ok, ok, what’s so bad about buying the stock and collecting the nice dividend until we see things play out over the next 6 months? Nothing is bad with that strategy. But if you are so worried about what is going to happen in the next 6 months, why not buy a 6-month Treasury Bill. If you liked the 3.1% yield of Coke, you would love the 4.25% yield on the bill. With the bill, the Government of the US guarantees that you will get back face value at maturity. With Coca-Cola, well, the only thing that the market guarantees is… um, nothing, and I can tell you that it rarely does what is convenient.

My message to you is that you should constantly be looking at all scenarios with at least this level of depth. Don’t just take recommendations at face value. Definitely don’t buy stocks simply because they are on sale. If you do your homework, you might find that their price declines might be for the right reasons. As I have said many times in the past few weeks, to win in 2025, you had better have many fresh, sharpened pencils and a fully charged calculator.

YESTERDAY’S MARKETS

Stocks stammered yesterday giving up early gains leaving many wondering whether the bulls were still on vacation or whether they had left the scene altogether. Weekly employment numbers came in stronger than expected; one week does not a month or quarter make, but in the absence of any real stimulus, traders chose to view it as a positive for the economy… er, negative for stocks. 📉🐻

NEXT UP

• ISM Manufacturing (December) may have declined to 48.2 from 48.4.
• Ward Total Vehicle Sales (December) is expected to show a second straight month of 16.1m unit sales.
• Richmond Fed President Thomas Barkin will speak today. Remember the Fed?

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